Classical And Classical Economics Analysis

791 Words4 Pages
Classical economics emphasises the fact free markets lead to an efficient outcome and are self-regulating. In macroeconomics, classical economics assumes the long run aggregate supply curve is inelastic; therefore any deviation from full employment will only be temporary. The Classical model stresses the importance of limiting government intervention and striving to keep markets free of potential barriers to their efficient operation. Keynesians argue that the economy can be below full capacity for a considerable time due to imperfect markets. Keynesians place a greater role for expansionary fiscal policy (government intervention) to overcome recession. Keynesian economic theory relies on spending and aggregate demand to define the economic…show more content…
It occurs in one equation. In the classical economy all markets clear their goods. In other words, everything is set at a price that it could sell at. Keynes said prices were "sticky" that people cannot instantly adjust prices and so distortions occur in the economy. Keynes replaced an employment formula with a price formula. Essentially aggregate nominal prices are fixed and occur at a higher price than the price to clear the goods market. This results in less employment than would occur in a non-distorted market. You can work and produce all you want, but you can 't sell it.. This is important because sticky systems reasonably well do predict the economy while classical ones do…show more content…
In Keynes, the immediate result is a reduction in employment, in the classical, it is an increase in the amount of work done and a reduction in prices. Both models seem to be correct depending on the time scale. The immediate effect does seem to be layoffs, but the long run effect is that work increases and prices fall. Because of the different opinions about the shape of the aggregate supply and the role of aggregate demand in influencing economic growth, there are different views about the cause of unemployment. Classical economists argue that unemployment is caused by supply side factors – real wage unemployment, frictional unemployment and structural factors. They downplay the role of demand deficient unemployment. Keynesians place a greater emphasis on demand deficient unemployment. For example the current situation in Europe (2014), a Keynesian would say that this unemployment is partly due to insufficient economic growth and low growth of aggregate demand (AD) President Ronald Reagan, whose 1980 election victory was aided by a recession that year, introduced a tax cut, combined with increased defense spending, in 1981, rejected Keynesian economics and embrace supply-side arguments
Open Document